Is Japan Teeing Off for Hostile-Deal Era?

By Kana Inagaki

A rare unsolicited takeover battle in Japan is drawing the scrutiny of bankers, as they watch whether hostility could replace the bows and firm handshakes that characterize the domestic deals market.

The courtship between the two golf-course operators at the center of the saga began like most other potential tie-ups in Japan PGM Holdings K.K. attempted to consolidate with Japan’s No. 1 golf-course operator Accordia Golf Co. last January, but talks foundered.

Then PGM went hostile. In mid-November, it launched a ¥42.5 billion (US$490 million) unsolicited offer to buy up to 50.1% of Accordia directly from shareholders. PGM was set up by Dallas-based private-equity firm Lone Star Funds in 2001 and listed its shares in 2005, while Accordia was launched by Goldman Sachs Group Inc. in 2003. It went public in 2006.

“Takeover bids are a common practice overseas, so we thought ‘why not’ in Japan,” PGM spokeswoman Tomoko Thompson said.

But observers say even if the takeover between the two golf-course operators is successful, it would be an exception. Bankers say it is unclear if PGM’s bid will succeed, especially since it is difficult to predict how individual investors, who make up around 40% of Accordia’s shareholders, will respond. PGM’s offer is open until Jan. 17.

The gambit could prove a winning one, however, because Accordia doesn’t have a stable base of friendly shareholders such as banks and institutional customers that tend to put long-term business interests before concerns about the share price. Until the bid, Accordia’s shares had been down 25% over the past two years.

“If PGM does succeed, it sets a precedent for similar companies defined by relatively new listings and relatively young shareholder bases,” said Peter Eadon-Clarke, head of Asian economics at Macquarie Securities.

PGM’s ¥81,000-per-share bid represented a 54% premium to Accordia’s three-month average share price. In Tokyo trading Friday, Accordia closed at ¥80,400, up 51% from Nov. 15, when PGM announced its bid after the market closed. The market has been closed since then.

PGM President Arihiro Kanda, who was an Accordia executive until May 2011, said in November that a combined company would have an edge in a market where interest in golf has declined as the economy slowed in recent years.

On Dec. 3, Accordia said it “sincerely urges all shareholders to not subscribe to the tender offer” because PGM wasn’t paying enough, and cited its higher earnings levels. Accordia logged a net profit of ¥11.3 billion in the year to March this year, almost five times PGM’s net profit of ¥2.3 billion for the fiscal year through December 2011.

To persuade shareholders not to sell to PGM, Accordia fired back by raising its annual dividend forecast to ¥5,500 per share from ¥1,600 and announcing a targeted payout ratio of 90% beginning in the fiscal year starting April 2013.

Ultimately, even if PGM’s bid for Accordia succeeds, Japan is unlikely to welcome hostile deals as a regular practice.

“If we ever do get an active market for corporate control or successful hostile takeovers there’s tremendous value to be realized,” Mr. Eadon-Clarke said. “On the other hand, it’s been waiting to be realized for decades.”

The country’s first all-domestic takeover battle dates to 2000, when Yoshiaki Murakami, a former trade ministry official, attempted, and failed, to win a controlling stake in real-estate firm Shoei Co. Several deals have since collapsed, including Oji Paper Co.’s bid for smaller rival Hokuetsu Paper Mills Ltd. in 2006, and New York investment fund Steel Partners Japan Strategic Fund’s attempts to buy both Sapporo Holdings Ltd. and Bull-Dog Sauce Co. in 2007.

What is needed to open up Japan’s M&A market to unsolicited bids, says Toshiaki Oguchi, a representative director at the Japanese unit of U.K.-based investment group Governance for Owners LLP, is successful takeovers by well-known Japanese executives.

“There needs to be some kind of discipline imposed on the market such as hostile takeovers so that companies do not ignore sagging share prices,” said Mr. Oguchi. He declined to comment specifically on the PGM bid for Accordia.

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